Fixing Financial Education

By John Iekel • July 02, 2018 • 0 Comments

Student loans, credit debt, mortgages, inflation, and somehow also trying to sock money away for retirement in the process — is it any wonder workforces are rife with financial stress? Providing financial education at the workplace — where so many spend most of their waking hours — seems ideal for better equipping them to handle financial stress and lessen its effects on employers and the bottom line. But a recent paper argues that the way financial education is provided leaves something to be desired, and makes suggestions as to how it could be improved.

In “So Many Courses, so Little Progress: Why Financial Education Doesn’t Work — and What Does,” a paper Martha Brown Menard wrote for Questis, she provides an overview of research on the shortcomings of financial education, why it can fail, and what is successful in helping employees to improve their financial behavior and outcomes.

“Executives are waking up to the fact that financially stressed employees bring these concerns and issues to the workplace, resulting in lost productivity,” says Menard, and are acting to address the situation.” Increasing financial literacy through employee education seems like an obvious solution,” she says, but “upon closer inspection it’s clear that financial education alone hasn’t worked — and perhaps it never can. The way our brains are wired to process information typically works against us when it comes to making sound financial decisions, and changing behavior takes more than a single class.”

It “certainly doesn’t” look like financial education is effective, says Menard, when one considers the findings of academic studies. She cites a 2014 analysis of 90 studies that found that financial confidence, willingness to take risks and familiarity with numerical concepts had more to do with improved financial behaviors than financial education programs.

Menard says that the researchers who conducted that study argue that most research on the effectiveness of financial education assumes too great a degree of preexisting financial literacy and exaggerates the degree to which those programs succeed in making employees more knowledgeable.

Rather, she says, financial education explained 0.001% of the financial behaviors the 90 studies examined. In addition, the Consumer Financial Protection Board (CFPB) found that “There’s no clear link between taking personal finance classes and saving more, paying off debts or raising your credit score.”

But why? Menard cites several reasons:

1. Just because one knows one should do something doesn’t necessarily translate to action.
2. The material presented in financial education programs can become obsolete in a relatively short amount of time.
3. Maxims such as the wisdom of saving 10% of one’s salary for retirement “are no longer sufficient in a changing economic environment where pensions are rare and defined contribution plans are the new norm.”
4. Financial education “appears to suffer from a ‘use it or lose it’ problem”: the researchers in the 90-study aggregation found that within 20 months almost everyone who took a financial literacy class did not retain most of what they learned.
5. Studies that have relied on participants to self-report their financial behaviors, introduce potential sources of measurement error such as the influence of social desirability and recall biases.
6. Educational interventions can vary greatly in content, length and delivery format, which Menard says introduces a large degree of variability and potential measurement error.
7. One-time financial education, says economist Annamaria Lusardi of The George Washington University School of Business, “seems unlikely to actually change habitual long term decisions and behaviors.”
8. A one-size-fits-all approach may fail to reach groups with more specialized needs.

“When you combine these critiques of the existing research with what we’ve learned during the past 50 years about behavioral economics, the surprising inadequacy of financial education to change behavior starts to make sense,” says Menard.

What to Do?


Menard does offer some suggestions for addressing financial education’s shortcomings.

Help individuals to bridge the gap between intention and action. When individuals have a major goal and even know what to do to reach it but don’t do what they know could result in reaching it, the result can be a paralysis that hurts long-term saving. Menard cites a study by the Center for Advanced Hindsight’s Common Cents Lab which suggests six steps for promoting behavioral change that will bridge the gap:

  • identify key behaviors;

  • remove barriers;

  • increase benefits;

  • define the metric for measuring progress;

  • identify and remove or reduce the worst barriers; and

  • add or amplify the benefit most likely to motivate behavioral change.

Menard cites similar findings by the Behavioral Insights Team, which suggests that behavior can be changed by:

  • removing barriers or reducing friction;

  • offering the right incentive;

  • promoting a sense of positive belonging; and

  • linking to a current situation.

Coaching. Menard observes that there are organizations in the United States that are applying the concepts used to change behavior to financial coaching programs.

“Typically, coaching involves interventions such as motivational interviewing that work collaboratively with an individual to identify behavioral outcomes, set goals, brainstorm strategies, create concrete action plans, identify strengths, build motivation, and provide accountability,” says Menard. However, she adds, “because financial coaching is a highly personalized process that meets people ’where they are,’ there may be times when specific advice or counseling are appropriate, given an individual’s circumstances.” Menard argues that coaching also is congruent with the concept of financial wellness as a holistic approach to personal finance, one that views money as a tool for living life in accordance with a person’s values.”

Menard notes that a 2013 project by NeighborWorks America and the Citi Foundation found that clients who participate in financial coaching improved in their financial comprehension and credit scores. In addition, she says, almost two-thirds reported that they no longer felt stressed about their financial situations after participating in coaching.

Principles of Financial Education. Menard observes that the CFPB in 2017 identified five principles of financial education that it says “make the biggest difference between failure and success”:

1. Tailor information to specific circumstances, challenges, goals, and the factors individuals face.
2. Provide information relevant and actionable to specific situations or goals.
3. Build skills that can be generalized, such as being able to find reliable information to facilitate decisions and information processing.
4. Build motivation by supporting people to focus on their values and standards, to persevere and build confidence.
5. Help create financially healthy habits and systems.

Key Questions


Menard suggests questions an employer can ask when offering a financial wellness program:

1. If financial education is part of the program, what does it look like? What will work for the organization?
2. Is there live access to human coaches or advisors?
3. What employee problems are addressed?
4. Is there accountability?
5. Will employees be able to estimate how much income they will have when they are retired?

“There’s no question employers are taking a more active role in helping employees in their journey to financial well-being,” says Menard. “It’s the right thing to do, and it makes good business sense,” she adds. Further, she says, “as more vendors introduce financial wellness offerings into the benefits marketplace, employers and decision-makers need to evaluate these products and services carefully, especially in regard to financial education.”